The Economy by Peter Crabb: Ethical lapses, not business goals, caused financial crisis

The stock market is up. The unemployment rate is falling. Housing prices are rising. It is enough to make you think all the sins of the global financial crisis are behind us.

Even though there are signs of improvement in business and the economy, many writers say corporations have lost their way. And without new rules, corporations are likely to cheat us again.

The sins of the financial crisis are still with us. Those sins are questions of business ethics, not of business itself.

Since the beginning of this year, the Dow Jones Industrial average has risen 10 percent. Much of the rise has been driven by compromises over national tax policy and hopes for a similar agreement on government debt.

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Meanwhile, the real economy is experiencing positive signs for employment. The U.S. Bureau of Labor Statistics reports that the unemployment rate declined in 22 states during September. Idaho’s unemployment rate stands at 6.6 percent, a 1.7 percent decline since December 2011.

The sector of the economy most hurt during the global financial crisis is also improving. The S&P/Case-Shiller National Composite Home Price Index has risen in each of the last four quarters. According to CoreLogic’s most recent report, Idaho ranks among the highest states in terms of home-price appreciation.

But who should we thank for all this good news? For some it is not business or the financial markets. They say corporations are to blame for the crisis, and unless they change their ways, these same businesses will bring us problems again.

A popular new book argues that business schools are teaching, and corporate leaders following, a flawed objective. The idea that corporations exist to raise the profits and value of shareholders’ interest is being challenged again.

Cornell Law School professor Lynn Stout argues that a focus on the market value of a company, or its stock price, is dangerous. Stout believes this approach “compels myopic short-term earnings tactics, endangering companies, their investors and even the American public. This reckless behavior often leads to investment disasters, leadership scandals, jaded executives and bankruptcy.” Stout is suggesting that the evils of the financial crisis and other business mistakes can all be blamed on the shareholder-value objective.

Stout may have a new book, but her argument is old.

In 1970, Nobel Prize winner Milton Friedman wrote a powerful op-ed in The New York Times addressing similar concerns that corporations were not serving society well.

Friedman’s essay, “The Social Responsibility of Business Is to Increase its Profits,” argued that those promoting social responsibility for business are actually “preaching pure and unadulterated socialism” and that such talk undermines “the basis of a free society.”

Friedman noted that this issue is one only for corporations, because individuals or proprietors are free to use their assets and resources as they see fit.

But corporate executives are employees of the owners of the enterprise. Executives, and for that matter all employees, are responsible to operate the business in accordance with the desires of the owners. In the fiercely competitive global business environment facing all managers today, companies don’t make profits and create value for shareholders will cease to exist.

In 1997, former Coca-Cola CEO Roberto C. Goizueta put it this way: “Creating value is a core principle on which our economic system is based. It is the job we owe to those who have entrusted us with their assets. We work for our share owners. That is — literally — what they have put us in business to do.”

Goizueta goes on to argue that when managers raise the company’s value for its shareholders, they also serve society. He writes: “ The exercise of what is commonly referred to as ‘corporate responsibility’ is a supremely rational, logical corollary of a company’s essential responsibility to the long-term interests of its share owners.” Goizueta effectively argues that the interest of society and shareholders are aligned.

The concerns of Stout and other writers today should not be misdirected corporate objectives but poor ethics. Shareholders and the public both have always required managers to operate within the law and to maintain the reputation and ethical good standing of the business. Corporations that do business unethically pay heavily eventually. There is positive relationship between maximizing value and doing business ethically.

For good economic and stock market news to continue, we don’t need new corporate rules and regulations. We need good corporate managers behaving ethically.

And good ethics in business are the same as good ethics everywhere. James Maxwell argues that there is no such thing as business ethics. Maxwell shows that the Golden Rule — Do unto others as you would have them do unto you — is the basis of all good ethics. This principle is easy to understand and common to cultures all over the world. It creates a win-win situation for both shareholders and society.

We can’t demonize corporations and financial markets. We can only encourage better ethical behavior.

Peter R. Crabb, professor of finance and economics at Northwest Nazarene University in Nampa. prcrabb@nnu.edu